By Tom Adams, an attorney and former monoline executive
I’m usually cynical about these “genius of Wall Street” articles, but the Vanity Fair article “Larry Fink’s $12 Trillion Shadow” by Suzanna Andrews, about the head of the world’s largest money manager, BlackRock, raises the cliche to another level. My skepticism results both from the disconnect between the glowing tone of the article versus some of the information presented, as well as how the depiction of BlackRock is at odds with my own observations of the firm.
Let’s go past the puffery and do some quick computations:
I count losses on over $12 billion dollars of CDOs and CMBS plus losses on other large investments during the crisis in this article, which i suspect misses several billion of dollars of other losses elsewhere in the portfolio.
I count dozens of highly questionable conflicts of interest combined with a seriously problematic Fed (and Geithner, once again) refusing to disclose critical information about such for conflicts. David Patterson is in hot water over $6000 in yankee tickets and about $20,000 in conflicted horse racing fees, but Blackrock can receive hundreds of millions of dollars on two sides of a deal while getting paid for dozens of other highly conflicted, government related companies. On what planet does this make sense?
I count repeated examples of an egomaniac consolidating a dangerous level of power and doubling down on its level of too big to fail with a total disregard for the any sort of systemic risk this might present.
The article also makes much of the Aladdin model, which has proven a very effective marketing tool for the firm:
But while its size was impressive, what would distinguish BlackRock was its state- of-the-art system for evaluating and managing risk. With 5,000 computers running 24 hours a day, overseen by a team of engineers, mathematicians, analysts, and programmers, BlackRock’s “computer farm” could monitor millions of daily trades and scrutinize every single security in its clients’ investment portfolios to see how they would be affected by even the most minor changes in the economy. Churning through 200 million calculations each week, its computers could simulate every imaginable shift in interest rates, every conceivable change in the financial markets, and stress-test the performance of hundreds of thousands of securities in numerous global-crisis scenarios.
Let’s start with a simple observation: did the use of Aladdin model save any of BlackRock’s clients during the upheaval of 2007 and 2008? Exactly how well did those models anticipate the market perturbations that we saw? Pretty much every quant based model performed poorly during this period. But the article is silent on this point, which is telling. If Aladdin miraculously outdid the other strictly math-based risk models, one would expect Fink would have made sure to stress this point. There’s every reason to suspect that Aladdin is yet another example of what Nassim Nicholas Taleb calls statistically-based risk models: “non-performing airbags”. They do a great job of measuring day to day risk, and a poor one of preparing users for the sort of price movements that will kill investors using leverage. And now this model and this analysis is effectively the new monopolistic rating agency for government controlled investment portfolios while displaying even less transparency than Moody’s and S&P did when their opinions dominated the market.
The article similarly has a very curious discussion of how Fink was on a short list to head of Merrill, and lost out to John Thain. The most obvious reason is massive conflicts of interest, since as the piece notes, Merrill owned 40% of BlackRock, but the story features this tidbit first:
Fink would tell people that Merrill’s board had virtually assured him that the job was his, but that the offer evaporated after he demanded he first be allowed to perform a full analysis of
the bank’s mammoth subprime portfolio to gauge the extent of its problems.
How would BlackRock not know how much crap was in Merrill’s portfolio? Even if he wasn’t sure on the ownership of the many crappy CDO deals that Merrill had originated, wouldn’t his knowledge of AIG’s portfolio (which indicated who each counterparty was) have given him a pretty good clue to Merrill’s distribution strategy? i mean, if a lowly guy like me had heard back in March of 2007 that Merrill was stuck with over $20 billion of MBS and CDO bonds, how is it this supposed genius of Wall Street seemed so unaware that he would want to be head of an insolvent company?
Similarly, how the heck did Blackrock sign up for billions of dollars of Stuyvesant Town exposure at the absolute top of the market, based on the assumption that the investors could kick out rent regulated tenants, raise rents and bring in new higher paying tenants in an environment where real estate prices (including apartment rents) were very likely soon to be plummeting? How many bad (and obvious) assumptions went into that deal that Aladdin seemed to miss? Had anyone at Blackrock ever actually picked up a local paper in the last twenty five years, which might have given them some sense of the relationship that rent regulated tenants had with their landlords? On top of which – a multibillion dollar deal entirely within one zip code? Do you really need 600 people, running 5000 computers, 24 hours a day to come up with that analysis?
So why is Larry Fink and his company the subject of such a glowing article? I had actually thought he was a pretty good businessman before I read this but he comes off looking like a bad analyst, a vengeful ratfink and a parasite who made most of his and his company’s money through government connections, blatant breaches of conflict and rule bending (oh, but he does fly commercial, so he must be a real down to earth guy). Seriously, from the time of the S&L crisis, has he ever not had a big government contract to keep the lights on, while submitting million dollar a day contracts which the government then fights to keep secret in flagrant violation of all established practices?
Where would Blackrock be without the FDIC, the RTC, LTMC, Fannie Mae, Freddie Mac, AIG, dozens of desperate state pension funds? When will someone audit their fees and assess what exactly it is they get paid for and why it is Palooka Bank in Iowa couldn’t do a better job? At least Palooka Bank would probably know better than to bet billions of dollars of its own and other people’s money on a New York City landlords being able to magically toss tenants out on the street.
Perhaps articles like these, which are so wildly out of tune with the current popular attitudes towards Wall Street genius, are finally reaching a saturation point with journalists and publications. Even as they try to celebrate one of the great bankers, they seem to run short of noteworthy accomplishments beyond cozying up to the great government fee paying machine.
Right on the mark.
“Churning through 200 million calculations each week, its computers could simulate every imaginable shift in interest rates, every conceivable change in the financial markets, and stress-test the performance of hundreds of thousands of securities in numerous global-crisis scenarios.”
Give me an effing break. “200 million calculations” almost surely counts each and every Monte Carlo simulation to calculate the price of one complicated product. Not the price in some possible world, but the price in this world. Some products can take 100 000+ calculations, so 200 million doesn’t actually go too far.
Similarly 5000 computers don’t go especially far, when it takes 1 computer 24 hours just to calculate the price and simple Greeks of a product.
Maybe the Blackrock products are simple, I don’t know, but the numbers are not as astronomical as you would think, and certainly don’t imply that every conceivable risk is being taken into account.
Alladin is tongue-in-cheek. Magic lamp, trickery, get it?
Allah-Din.. god is just. Hmmm…
Everyone knew Stuy Town was big scam. Just follow the money. Who were the previous owners who got paid a fortune? That’s one clue. Fees generated from the project… etc.
What is it with this generation of con artists from the San Fernando valley? Bill Gross the hotairtrenepeur (not PIMCO… he’s a whole other horror story) grew up just down the street from this guy.
Also, did anyone pay attention to the fact that he used the word “enormity” when he talked about his contributions to society? Pretty telling.
Can anyone confirm an ongoing connection with Pete Peterson? Do they dine together? Rub each others bunions?
Having read several books about the crisis, I’ve come to the conclusion that what you’re saying about Fink applies to all of them. Is Jimmy Cayne, for instance, anything but a bridge playing schmoozer?
Way off the mark …
You missed the point. Its a formula wealth worship article. A scamerican dream staple propaganda article …
A Kyrie eleision for the ka-ching!
A beatification of the bucks,
A memorial to the millionaires,
A glorification of the gold,
A deification of the almighty dollar …
This article was a wealth blow job! Suzanna Andrews goes down on the rich man’s tool for her daily crumbs. Demeaning, deceptive and oh so Darwinian …
You fell for it hook, line and sinker and you got sucked right in and talked about the “puffery” of Black Rock and what a poor performer they were. You validated and legitimized the status quo!
Sheesh … you could have bounced off this Suzanna Andrews blow job article to discuss; the maximum wage, or maximum allowable asset wealth per individual, or how corporations are really little despotic governments, or aggregate generational corruption, or how we need a new electoral process, or Fairism, etc.
What a limp dick review! You must be happy with your present crumb supply!
And the Larry Fink Photo was a real scamerican classic rich guy pose … you could have mentioned that he looked like he had a stick up his ass.
Deception is the strongest political force on the planet.
ball don’t ever go book shopping in Barnes and Noble’s business section — where I was yesterday buying Yves’ book — because you’ll have your own private apoplexic explosion and there is armed security there.
The business book section is always a testament to mankind’s ability to say nothing at all in several hundred pages of vapid cliche ridden nonsense. Two drunks at a bar usually make more sense.
But the late-empire-style self-referential narcissim on display in the book jacket photos — one after the other — rich dudes in business casual looking very smarmy and pleased with themselves — telling their story about how they got wealthy and how you can, well, you would need oxygen and smelling salts to regain your senses.
Do any of these bozos have a clue beyond political connections, luck or birth? That is a philosophical question with an easy answer.
Bonfire of the Vanities, redux.
It wasn’t all glowing. Janet Tavakoli has been a big critic of Blackrock’s no-bid contracts, and she lays it out in her book. She is quoted in the article:
“You see a lot of concentration now in the financial industry of people who are more connected than brilliant,” says Janet Tavakoli, the president of Tavakoli Structured Finance and the author of Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street. “So why BlackRock? Not to take anything away from Larry Fink, but all the contracts awarded to BlackRock, in the way they’ve been awarded, deserves some question.”
When A.I.G. was bailed out by the New York Fed, that same week, BlackRock was again brought into the company—this time to evaluate and advise the government on what to do with the $100 billion of A.I.G. assets, including the now infamous credit-default-swap portfolio that the Fed had taken over. For several months, BlackRock would have two teams working inside A.I.G.—one working for the company’s management, the other for the Fed. It was a situation so rife with potential conflicts of interest, says Charles Hallac, that for a while neither team was told about the other. By then, BlackRock had already been hired to monitor the troubled portfolios of Fannie Mae and Freddie Mac. In December 2008, BlackRock would get yet another contract from the New York Fed, this time to value $301 billion of Citigroup’s loans and securities, most of which the U.S. government guaranteed against losses as part of its bailout of the giant bank.
And shortly after Bear Stearns collapsed, Fink advised investors to put their money into riskier, high-yield debt, just before that market tanked. BlackRock, as Janet Tavakoli points out, also contributed its share to the toxic-asset morass—with close to $8 billion of collateralized-debt-obligation deals that defaulted in 2007 and 2008.
Vanity Fair has always been and intends to always remain inside “the bubble” of wealth and privilege. You’re just noticing the lens effect the bubble has from the outside, magnifying the most egregious caste assumptions that remain invisible in the un-bent light inside the blessed sphere.
Incidentally, per the following post, TED’s problem is that he’s grown quite comfortable in a world from which his faults are only visible from beyond its borders.
Reading the article, you sometimes have the impression
the guy is helping out as a public servant, not really
doing ‘community service’, imho, just squezing taxpayers’money out of the ‘Treserve’, another scam in the line of George Soros as economist and philanthropist..
Yeah, the charming buggahs’demonstrate a lack of enthusiasm regarding their fiduciary responsibilities also. That shouldn’t surprise anyone.
A few years ago I owned a BR government sovereign foreign bond fund looking for some stability with currency play. I noted that in 2007 they bought a large wad of declining MBS in an early, pre-crisis bailout. Sure enough, my next statement had a new 2% chunk devoted to MBS. One might ask the question, what the hell are US MBS doing in a foreign sovereign bond mutual fund. Well, the answer is, every mutual fund in the family had a bite of this tasty morsel.
When the next 6-month statement showed a sizable decline in the position, I finally dumped the fund – could never get past their answering machine.
“BlackRock’s “computer farm” could monitor millions of daily trades and scrutinize every single security…to see how they would be affected by even the most minor changes in the economy… its computers could simulate every imaginable shift in interest rates, every conceivable change in the financial markets, and stress-test the performance of hundreds of thousands of securities in numerous global-crisis scenarios.”
Oh boy, computerized statistical trading. Now what could possibly go wrong with that? It’s a sure thing, ironclad, take it to the bank—the Fed that is when it goes bad. It’s a remix of the genius mathematician computer whizzes at LTCM (aka [Short]-Term Capital Management), the prior hedghog-bankster bailout in this new era of rolling bank bailouts.
That was my first thought, too. LTCM. And I’ll bet Blackrock doesn’t even have any Nobel Prize winners.
Exactly, Doug. All of those computers and genius mathematicians didn’t do jack sh*t for LTCM. In fact, to the contrary… they HURT the cause. Dramatically. The computerized statistical trading via physicists isn’t part of the solution – it’s part of the problem. Anyone who doesn’t realize this… well, hell…